Thursday, March 5, 2020

Politically allocated (aka "affordable") housing

I've long been curious about politically allocated housing. (It's called "affordable," and "below market rate," but why should we let the left make up all the buzzwords?) A free market economist smells a rat of inefficient subsidies, and huge inequality-increasing implicit tax rates.

If it's "below market rate" then ipso facto more people want it than can have it, so it has to be allocated by standing in line, lotteries, and/or extensive qualifications. That means it's going to go to people who have been around a long time, not to newcomers who want to get jobs. Once you get an "affordable" unit, I would figure, getting a better job or a raise is going to cost you rent, or getting kicked out of your apartment. Moving across town to get a better job is out of the question -- there is a long line for those apartments. The "affordable" deals all seem to be worked out on a case by case basis, making it very hard for an economist (or voter) to figure out what's going on.

But that's all suspicion. I have been looking for a comprehensive study of these programs, but haven't found one. (Hint: doing such a study looks like a great idea for our free market think tanks!)

Enter a great anecdote: "How Do You Measure The "Success" Of Affordable Housing?" by  Francis Menton, the "Manhattan Contrarian"
Here in Manhattan, it is an article of unshakable religious faith that conjuring “affordable housing” into existence, through some magic recipe of taxpayer subsidies and coercion, is a fundamental responsibility of government.  
In the Bay Area too.
I called government-coerced “affordable housing” the “most expensive possible way to help the smallest number of people.”  
A good theme, but he too misses the possibility that it may be the most expensive possible way to hurt  a larger  number of people, by tying them to a specific income level and apartment.

Menton scathingly reviews a West View News article, "to guarantee the future you have to buy it," which is actually true taken completely out of context. (Buying an apartment is a great hedge against rent increases,.) He covers the story of the Penn South Houses,
This complex of 2,820 units is located between 8th and 9th Avenues, from 23rd to 29th Streets.  At its closest point, it is just two blocks, 0.1 mile, from Penn Station, the busiest train station in the country.

I need to go by on a tourist visit to boondoggles someday.
This complex is what we here in New York call a “limited equity co-op.”  Back in the 60s when it was built, the sponsor (a labor union) sold the apartments for deeply subsidized prices of about $7500 - $15,000 per unit, depending on the size of the unit.  The deal was that when you sold, you had to sell back to the co-op for the exact amount you had bought for — no profiting by selling on the free market.  The project also got a deeply-subsidized mortgage (financed by a tax-exempt bond sale by the State), and a total property tax exemption for 40 years....
Today, a benchmark price for a good-size two-bedroom apartment in this neighborhood would be about $2 million.  According to the WestView News piece, a recent price for a two-bedroom apartment at this complex was about $150,000, subject to the same deal that when you leave you must sell it back for exactly what you paid.  To get one of these apartments, you must go through a waiting list of about 20 - 30 years. 
20-30 years. Well, so much for the young family who wants to move to NY to get a better job.

Menton adds up the subsidies:
But let’s take a more critical view of what the cost of this Penn South thing really is:
The property tax exemption for this complex is worth at least $10,000 per year per apartment, and up to $20,000 per year for larger apartments.  This annual non-cash handout goes entirely to people who by definition are not poor. [Menton added up the costs to live there. You have to be decidedly "middle class"]
Other people who must pay the additional $10,000 or $20,000 tax per year for comparable apartment also must earn cash income to pay that, and then pay tax on the cash income before they pay the property tax.  That’s another subsidy of about $4000 - $8000 per year per apartment. 
People who sell apartments in the private market must pay capital gains tax on the sale at a rate of about 20% federal and 11% New York State and City.  Whatever you might think of the altruism of these people in agreeing to resell without personal profit, they also avoid paying these taxes, that are used to provide government services. 
The article linked above reporting on the federally guaranteed mortgage loan estimates the savings to the complex at $3 million per year.  That’s another $1000 per year per apartment handout that others don’t get. 
Add it all up, and a fair estimate of the cost to taxpayers of this project is around $20,000 per household per year.  And what exactly is the superior moral claim to the annual $20K of these people over, say, you?  If every “middle-income” household (of which there are around 100 million) in the country is entitled to the $20K, we would be talking about an annual $2 trillion +/-.  
This is really good -- not all subsidies are on budget!

Menton gets a very important inefficiency. By subsidizing long-time residents to stay put, we subsidize a very inefficient match of apartment to location.
And even that $20,000 per year per household is on the assumption that in an unsubsidized world this site would remain with the same buildings and the same number of apartments.  If instead the complex was auctioned to the highest bidder and then put to it’s highest and best use — which probably would be some mix of office buildings, hotels, and high-end condos — the resulting property taxes alone would probably come to at least $50,000 per Penn South apartment, and maybe up to $100,000. 
Coase rolls over in his grave at many of these deals. How many of these residents would move out in a minute in return for $100,000 per year?
And finally, did I mention that this project is in close walking distance to Penn Station, the busiest train station in the country?  The government spends additional billions to run hundreds of trains a day in and out of there, only to find a high percentage of the nearby blocks occupied by buildings that almost no one traveling into the City is going to.  So those people need to get off and take the subway, when there could be hotels and office buildings right nearby.  Subsidized housing is about the worst possible land use in the immediate proximity of a major transit hub.


  1. Great post... let us go to free markets in property development, which would mean the abolition of all property-zoning rules.

    I figure that after about 10 years of wide-open property development, then we can rid ourselves of all affordable housing programs, subsidies and rent controls.

    Should be home-mortgage interest tax deduction also be eliminated?

  2. I remember growing up in New York City and learning that "the projects" for a better class of people would be made available. Old cities are merely dissipating their rents in vote buying. Clearly, cross subsidies fro outside the jurisdiction promote such behavior. I do not know how to stop it, except to let competing cities grow. The most useful thing outside voters can do is to ignore the problem.

  3. I enjoyed this article, but all of this is quite obvious, even to people without an economics background or without reading studies/papers.

    It seems somewhat reasonable to provide government safety nets that offer cheap low cost housing options to people living in tents, or living out of cars. But the city giving some of the most expensive, hotly desired, premium priced real estate to a relatively small number of randomly selected poor people, sound offensively dumb. That's like lending Lamborghinis to poor people.

    I know hard working two-income families that make $100k but can't afford to rent in the nice neighborhoods given by lottery. That seems so absurd.

    A reasonable solution is sell the premium real estate to paying customers for top dollar, use that money to offer bare bones safety net services for the masses of poor people and let everyone else buy on the market. I have low expectations of that happening.

  4. The micro story makes sense. How would it look in aggregate data?

    "We find sizeable effects of supply constraints on house prices, but
    modest‐to‐negligible effects on rent, unit size, lot size, location choice within metropolitan areas, sorting across metropolitan areas, and housing expenditures. We conclude that housing supply constraints distort housing consumption and affordability much less than their estimated effects on house prices would suggest."

  5. "Roofs or Ceilings The Current Housing Problem" - Milton Friedman and George Stigler, 1946.

  6. The problem seems to lie in the rigidities here. You need to force the line to move forward, so more people can get their turns. How about kicking out tenants/"owners" every 3-5 years?


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